July 27, 2016

Get negative equity or die tryin

I’m not sure how you’d even go about lowering property values by 50% in a way that wouldn’t crash the economy, but what you could do is plateau prices via the usual suggested mechanisms (tax capital, build more etc) while running a policy of high wage inflation to reduce the relative value of property. Ten years of stagnant property values and 4% inflation gives you (furrows brow) a 40% reduction and no one goes underwater.

Update: As gleefully pointed out in the comments, inflation is compounding so you actually get a 48% increase over ten years.

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Inflation is compounding. So 10 years of 4% inflation gives you (starts to furrow brow but then reaches for the calculator) a roughly 48% increase or, seeing you talked about a reduction, today’s prices would be about 33% less than in 10 years time.

And of course, it is a well known law of blogging that it is impossible to correct someone’s calculations without making similar and often bigger errors so take these figures with a grain of salt.

Unless you quiet the post war dream of being a homeowner and create conditions where it’s ok to be a renter none of those controls are going to work. But then again being pro-homeownership is one of the planks of our political campaigning, along with gangs are bad.

+1 Andrew. @Robert: I don’t see any reason everyone can’t own their own house if they wanted to. Everyone (except the homeless) lives in a house – so there’s enough houses to go round. The only question is whether you rent it or you own it. Most NZ (well, at least Auckland) landlords would be losing money if capital gains stopped. They might not want to be landlords so much then. Most NZ (well, at least Auckland) renters are getting a great deal in that they pay less in rent than the outgoings on the property. The only financial problem that would make them want to own instead of rent is that they’re missing out on capital gains (and all the intangibles of ownership as well).

I think sooner or later someone will be successful in stagnating property in Auckland. Probably around the same time interest rates go up. Then a bunch of landlords will be under water, and either have to contribute cash to keep things going, put up rents, or sell the property. A stagnation could turn very quickly into falling prices if that happens.

Good ideas, but please recognise these are good ideas of themselves. It is a good idea to tax unearned windfall profits, allow wage growth, build homes to reduce homelessness and so on. If we go into it with the expressed purpose of correcting a housing market, we’ll probably fail by that yardstick.

The problem with all this supply/demand reasoning is that it has the sort of underlying assumption that if we do this then that will happen, when in reality the global demand for housing is off the charts obsessively high. Nothing we can do is going to roll a global property boom back. The plateau of which you speak is unlikely to happen and people are going to over extend themselves at the height of the boom.

Auckland builds (by global standards) at an extremely slow construction rate, over prices land, has low wages and there is virtually no taxation on capital gains. Melbourne builds apartments 4x faster than Auckland, taxes capital gains, has stamp duty and higher wages. Yet both places are completely unaffordable and will remain so as long as the boom continues.

The better trick is to focus on the good things we could achieve by using this investment flow, while it lasts. We should do the good things. Let the boom sort itself out.

Open up more land around Auckland, which will reduce the land component cost of housing. This will free up about $250,000 per house under the current market value of a home and allow for the hiring of more people at higher wages to do the work.

Ten years of stagnant property values and 4% inflation gives you (furrows brow) a 40% reduction and no one goes underwater.

Actually, the more I think about it, the more this is plain wrong (even setting aside the compounding nature of inflation).

Let’s stipulate median house price in Auckland of $1 million and median income is $100,000 (just to make life easy).

“Crash” house prices by 48% and the median price becomes $520,000, or 5.2 times median income.

Increase median income by 48% to $148,000 without changing median house prices, and they still are 6.7 times median income.

In other words, you need to inflate wages by a much bigger percentage figure than you need to deflate house prices if you want to improve “affordability” (and that’s setting aside Rob H’s question of how you get “high wage inflation” in the first place).

I’m with Geddis. The ratio of median house price to median annual wage is the figure you want to look at. Economists think above 3:1 is unaffordable, I think the current ratio is around 10:1 in Auckland so you would have to triple wages at least.

You hear a lot from commentators about the government struggling with this but what you hear much less of is that they don’t want prices to go down at all. Meanwhile, the landed gentry loves them and anyone jumping on the property rocket is simultaneously jumping on the National train (as the latest RM poll seems to suggest) to rapid wealth creation through sitting on hands, doing as little as possible and blaming everyone else. Then there is this: http://www.stuff.co.nz/business/industries/82465472/ray-white-signs-deal-with-lianjia-as-it-launches-into-china

“The Greens are developing a policy which would aim to cause house prices drop to between three and five times the median income if the party was in Government. It would involve a capital gains tax, restricting non-resident, foreign purchases, and removing tax exemptions for property investors.”http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11682323

“The Reserve Bank’s former governor Don Brash and former chairman Arthur Grimes have both called for prices to be cut by 50 per cent.”

So the Grimes/Brash/Turei bandwagon is rolling. Danyl writes “I’m not sure how you’d even go about lowering property values by 50% in a way that wouldn’t crash the economy”: looks like the Greens plan intends to produce a soft landing. I suspect prices will plateau anyway due to recent govt & Reserve Bank moves & further ad hoc tinkering that JK can authorise when he feels like it (due to free-market ideologues having pulled their heads in so far all you can see is shoulders). The real question is whether decisive intervention is required. And, if so, at what point in the electoral cycle?

Does anyone know where the 3 times income thing comes from? How robust is it? Surely affordability is relative to the product of long term interest rates and house prices not prices alone? If interest rates have (say) halved compared to the 90s, then maybe 6x is the new 3 for this generation, so what adjustment is then needed to get from 10x to 6x and how much more achievable might that be?

“Labour and the Greens recently struck a co-operation agreement including a no-surprises policy but Mr Little said Ms Turei had not raised any plan with him, or others in the party, to deliberately push down house prices.”

Andrew was surprised? Metiria may remind him that she already called for such a plan previously. Not a surprise that he views market intervention as irresponsible – reverting to traditional Labour economic philosophy seems serious misbehaviour.

Danyl, you really have to get over this idea you have that people pointing out your errors are doing so just to point-score and burnish their own egos.

As someone who twice pointed out Danyl’s errors, may I just say that this summarises my motives almost perfectly? If you’d just added in “fed their overwhelming sense of smug superiority”, then you’d have nailed it totally.

Re comment #19: I saw Brash mentioning this as if it’s conventional wisdom for economists – not just in this country either. Probably derives from the stasis of the Keynesian period (’50s-’70s).

You’re probably right to doubt it’s robust logic. The economy is really a random walk (particularly over long periods of history) and all any stasis phase does is create false impressions of normality that proceed to structure everyone’s social reality for a while. Wouldn’t surprise me if your 6x ratio turns out to be the new normal.

I’m still amused at Andrew Little reprimanding the Greens for taking a former Reserve Bank chairman and a former Reserve Bank Governor sufficiently seriously as to act politically in accord with their recommendations. The idea that leftists ought to demonstrate prudence and competence in the handling of government financial policy is apparently anathema to him. He must have consulted with Grant Robertson: `to impress more voters, we need to be wackydoodle’.

I’m surprised anyone takes issue with Andrew Little a) not committing electoral suicide by calling for house prices to drop – this ain’t no morality fable, it’s politics, and b) when asked, telling the truth that he hadn’t been consulted on the policy. Which was a new announcement, hence why it’s in the news.

Also, anyone who quotes the Roy Morgan as a credible poll immediately hereby loses their right to be taken seriously.

It would be non-pc of her not to consult. I personally don’t know, but suspect the economic policy group would have been involved plus the parliamentarians. Possibly the Exec but that was originally supposed to be admin function only & I don’t know if it evolved to be more than that. Here’s an excerpt from her GP website statement:

“I want to be very clear that we are talking about a responsible, carefully managed reduction in house prices over a period of time like 10 to 15 years.

“The Green Party is putting together a plan for how to reduce house prices responsibly and gradually, and that will include making sure people who’ve recently taken out big mortgages to buy a home are safe and secure.

“We know housing isn’t affordable for families now, so the only way to protect people from market instability is to lay out a plan using every tool we’ve got to slowly bring down house prices to a reasonable level.

“Nobody, including the Green Party, wants to see the housing market crash and equally nobody thinks the current situation can go on like this.

So, a soft landing. The old leftist idea of a planned economy revived in the guise of a medium-term fix. Arguably more sensible than JK’s random twiddling of the knobs…

“The Green Party is putting together a plan for how to reduce house prices responsibly and gradually, and that will include making sure people who’ve recently taken out big mortgages to buy a home are safe and secure.

Safe and secure – and over quite a long time frame. That’s a big promise. How would they do that? So some one who buys a home now with a big mortgage is going to be protected by the Greens from a 40% drop in value? How?

We also shouldn’t forget that housing affordability is more about mortgage cost than about house price. If interest rates are 10% and you can afford a $500,000 house, then if interest rates drop to 5% you can now afford a $1M house. Interest rates are historically low right now in NZ, so affordability is nowhere near as bad as people who look at only house prices would have you believe.

What many aren’t talking about a lot is the role that interest rates have in allowing people to pay more for houses, and therefore the role that interest rates would have in lowering house prices again (were interest rates to rise). That’s my consistent worry about the Auckland market – there’s a lot of very leveraged people who can afford their house at 5%, what happens when interest rates go up a few percent?

We’re about to sell the family home in an area of West Auckland where no one used want to live. Hence it was cheap and my mother could afford it. No one chose to go there unless they wanted to dump unwanted pet cats which inevitably made their way to my mothers doorstep.

Now, surprisingly, it’s a popular place to live and the prices have gone up. But nothing really changed it just became more popular because the location is more valued by more people.

There’s similar stories all over Auckland most notably Grey Lynn and Ponsonby. And some families who have lived there for a long time are now lucky and are sitting in capital they never dreamed of having. But nothing about the suburbs really changed – it’s just more people appreciate what those suburbs offer.

These are long term demographic changes – poor outer and inner suburbs becoming more valuable as more people seek particular lifestyles. And this process makes some people unlucky and some lucky. It’s not nevessssily driven by evil property speculators.

As a student I lived in Grey Lynn and now can’t possibly afford to buy there. I lived in Sydney but can’t afford to buy there now.

That’s just bad luck.

So we bought a cheap apartment in a run down area at a time when the apartment market was immature and it was harder to gets loans for them. We only just scrapped up enough for a deposit. Now the area has slowly become more popular, the apartment market has matured to some degree, banks are more willing to lend on them.

A bit of good luck.

I think a major role of the State is to even out to some extent these vicissitudes of fate. But I don’t think it’s easy and I don’t think it will ever be completely achievable.

However if the situation is reduced to a group of evil people doing evil things – foreigners, speculators etc – then it’s easy to present superficially emotionally attractive solutions. Let’s blame someone.

Yes, the question of how is what everyone will wonder about. Yet did anyone ask Brash or Grimes that question? If the experts don’t know, the politicians sure as hell won’t.

So the obvious thing for the Greens to put in their plan is an advisory panel of those two guys & any other accomplished economists (Brian Easton, plus some from younger generations) who volunteer to help. Require them to produce consensus decisions as output. If such a panel were appointed to advise government in the national interest it wouldn’t matter who won the election. No, I don’t expect the Greens to be that clever.

House prices not moving while the price of labour rises has been part of the traditional cycle of affordability in Auckland for the last 45 years. The up part of this cycle is a tad more extreme than the last, but with the volume of building occurring and predicted to occur the flat part of the cycle for house prices may be more extreme too.

My guess is that certain parts of the Auckland market will plateau and , counter intuitively, because of the new Unitary Plan sone will continue to rise. Land prices in areas where one can now build higher apartment buildings will go up.

This graph illustrates that for many regions property values are less than their 2007 values. Click on “Since 2007 market peak change (%)”. It shows that large increases in property prices have been confined to Auckland and Canterbury. But for many regions, property values are below their 2007 values. (These data were published 12 months ago.)

An interesting observation on the unhealthy grasping culture of greed infecting Aucklanders at the moment: In recent weeks two engaged couples I know fell apart over mercenary pre-nupts that basically aimed to ensure the prospective wife could never get a cent of the prospective hubbies house.

I agree with the comments by Andrew Geddis @ July 27, 2016 @ 5:38 pm and then at 6.03 pm

And I too felt incredibly smug, superior and gleeful when I wrote my comment about FINA306. I even searched the Victoria Uni website to find the appropriate paper so I could sound even more smug. I did so in the very best traditions of blog comments.

That is twice within the last month that you have agreed with me in this blog’s comments thread. I hereby serve notice that should this behaviour be repeated, I shall be forced to lodge a complaint with The Internet’s Owner to have you sanctioned. My credibility (stop laughing) cannot survive such hostile actions.

I reread the post to find out how Metiria wants to crash house prices over 10 years. In fact, Danyl did suggest means – “tax capital, build more etc”. My (already low) willingness to have my house devalued would be even lower if I had to pay a “capital tax” in the process. The expression “drop dead” comes to mind.

Inflation is not necessarily linear and does not necessarily compound.

If by “linear” you mean “isn’t necessarily a constant” and/or “can affect prices in specific areas of the economy to a greater or lesser extent than the level of general inflation” then yes.
It does however compound simply because it affects prices over time.

Isn’t that interesting? It invalidates the free-market logic of supply & demand creating outcomes. Anyone with half a brain knows the local bubble has been driven up by excess immigration – the only surprise being the number of commentators lacking half a brain. Government attempts to pretend the problem can be solved by building more have only been able to fool media operatives & Labour, as far as I can tell.

The Nats growth-addiction requires them to flood the country with foreigners. Pathetic attempts to build enough houses to cope with the flood are unlikely to seem more than a sham to kiwis able to discern the relation between cause & effect.

In the short-term, it may be politically expedient to oppose devaluation of housing prices, but how long can that last. As the Baby Boomers retire with their property empires (often mini-empires to be fair), the younger generations will have to fund an increasing Superannuation bill. At what point, will funding the lifestyle of what is basically a landed gentry become politically unpalatable (especially as many of the younger generations will not have access to such generous Superannuation, it will be unaffordable long before they retire, and they will have limited access to build their own property empires).

You know retail in NZ is in a dire strait. Tired and tacky shopping streets are full of shabbily dressed people who buy cheap ill fitting clothes in shades of blue, black and grey and shuffle along like a factory scene in 1984. I had lunch with a New Zealander yesterday who complained her and her partner had not been out in Auckland for over a year as they frantically save every penny to try and get a deposit.

The sad shops, the depressed clothing ranges, the poorly dressed people are signs of the gigantic amount if money the banks are sucking out of the economy and shipping back to their foreign shareholders. The housing bubble is a form of economic colonialism that is sucking us dry for the benegit of overseas banks. A collapse in housing prices might at least see a bit more of that money spent at home.

The easiest way to have a 50% drop in property values is to continue to build really slowly. That way when the macro conditions (currently in effect here, Aussie, Canada, America, UK and Switzerland) change – we will have the smallest possible number of buildings. We will have stopped being booming & dynamic Auckland and gain a more mature, dare we say Wellingtonian, type demeanour – with prices to match.

One way of running wage inflation would be a UBI. Fund it with your choice of measures. Has the added bonus that it’s money in the hands of the poorest people. The homeless might even be able to afford some rent.

I agree that the Swiss & Japanese cases are an effective counter-argument but suspect that, as Gregor mentioned re Japan, the local drivers of their bubbles are different. Bubbles do happen for different reasons. Remember that the tulip bubble was driven by a fashion trend. The common factor is the herding psychodynamic.

I agree the UBI would help, in principle, but primarily via restoration of equity so primarily psychological too (rather than economic). In practice the UBI is proposed to kick in at around current benefit levels to make the govt budget workable. The Greens adopted it as policy pre-Alliance (it’s still in their economic policy) but the trend around the world in recent years is influential establishment folk (both left & right) advocating it due to the spreading perception that post-gfc capitalism is barely functional.

Incidentally, reading Neil’s personal story early this morning prompts me to share mine here. Nigh on half a century in the land of the aucks, yet have never become one. I sold my home in Glen Eden unconditional 10 days ago. When the bulk of the money enters my bank account in several months time I’ll be wealthy for the first time in my life (mortgage-free since ’99, no partner). It’s a major psychological transformation: as a kid in the ’50s I could never go to the movies like the others. My dad was a clerk (lowest rung of the middle-class ladder) & my parents said we were too poor to afford it.

It’s my fifth property, but I did three with partners. I went into it post-gfc at the bottom of the trough like you’re supposed to. May not have sold out quite at the top of the cycle but financial doomsters abound online & even savvy people have been publicly warning of system crash for quite a while so I decided to bail now just in case. Mind you, who’s to say money in the bank is much safer either? Anyway, call me a capitalist if you like. I can’t deny it. All I can do is honestly declare that it was never my intention to become one – having always been one of those weirdos who thinks money is merely the means to an end…

It is like watching a train wreck in slow motion. If property prices keep rising, house ownership continues to accumulate in the older generations and Superannuation keeps increasing, how do people think it is going to end? It will be like Winston Peter’s in reverse. It will be ripe for populist politicians to ignite the spark of generation conflict. Capital gain taxes would be the mildest of policy options on the table. We need to prevent this from happening, which requires action to devalue house prices relative to income. You cannot just dig your head into the sand.

Since we’re sharing stories, here’s mine. I have a rental property. It’s not in Auckland. Over the last decade, the value has (I think) risen moderately, in large part because I’ve spent a lot of money on maintaining and improving it. I have very little enthusiasm for the Greens devaluing it by 40%, and not much more for having to pay some kind of CGT if and when I decide to sell it.

Well since we are sharing stories, I have most of my wealth in index shares fund because I believe in investing in productive assets that will hopefully grow the economy. I pay tax on the income I earn from my investments. Because I am younger than most of you (I am guessing), I also have to pay back my student loan, which means I am on effectively a high rate of tax despite a relatively modest income. Every year, I watch the Superannuation bill get bigger and bigger. Over time, the younger generations will be paying the bulk of Superannuation, while the people on Superannuation will be paying little to no tax on their property fiefdoms, while living the high life.

I am not actually that angry and you all seem like good people. I am just trying to show you the anger that will keep building in the system, if nothing is done. Anger that populist politicians will find easy to exploit.

My mistake you are quite right. I take it all back. I would hate to deprive you of your hard-gotten capital gains. House prices should keep going up and house ownership should continue to accumulate in the wealthy older generations. Nothing bad will come of this. All’s well that ends well.

I have most of my wealth in index shares fund because I believe in investing in productive assets that will hopefully grow the economy

I hate to break it to you, but investing in an index fund (of listed share market equities) probably isn’t doing anything to ‘grow the economy’. An index fund buys and sells equities or other financial instruments already in the market; basically the sharemarket equivalent of buying and selling pre-existing residential properties. Index funds generally don’t invest directly into new startups or IPO’s.

I know, I was trying to illustrate a line of attack a populist politician could use (same with trying to link house ownership to Superannuation unaffordability). I think we have firmly established that in politics a line of attack does not have to be absolutely true, just sound truthful enough to a wide enough group of people. I think that line of attack could sound truthful enough to enough people (how many people really know how the Sharemarket works?). That is all that matters now, for better or worse (and I think worse).

What John Key has accomplished in Auckland looks rather like a return to the 19th century rentier system where comfortable participation is privileged to the wealthy, and wage-slaves are allowed to participate as a lower class based in shoe-box apartments.

Class-consciousness hasn’t been evident in Aotearoa for almost a century, so it won’t just be the media hiding from the new reality. Even the victims of the Nats will pretend that it doesn’t exist.

The Greens’ advocacy of a sustainable economy wasn’t just based on eliminating destruction of ecosystems, but also on the principle of inter-generational equity. The frame used was “sustainable in perpetuity”. If younger generations want to ensure this outcome, it would be better for them to assess whether the plan the Greens are formulating will deliver it. Or they can continue to elect left/right governments who will continue to shaft them.

Sadly, I suspect the answer is roughly the same as the number of people who really know how the property market works and, in both cases, it’s a far smaller number than the number of people who think they know how these things work.

Of course it does not necessarily compound, because compounding takes into account last year’s increases, and that is not necessarily what happens with inflation. Inflation could be 3% in 2012 and 1% in 2013 and -10% in 2014 and 28% in 2015, so it’s not really compounding is it?

Phil #73: how many property rentiers are the same people who gambled on the 1980s sharemarket bubble – and lost the bet big time? I suspect lots and lots.

Antoine: A massive property crash is never ideal. But it’s about the only thing that’ll put “Generation Rentier” in its place. Unless of course, there’s some way to creatively disrupt the housing bubble, just like a tech startup that makes it big. Buckminster Fuller said it best: “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.”

Buckminster Fuller said it best: “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.”

Long derided as a hopeless utopian, Fuller seems to be enjoying a kind of posthumous rehabilitation. On concepts such as a universal basic income in a post-work world he was certainly ahead of his time:
“The youth of today are absolutely right in recognizing this nonsense of earning a living. We keep inventing jobs because of this false idea that everybody has to be employed at some kind of drudgery because, according to Malthusian Darwinian theory he must justify his right to exist.”

Only problem with that is the “youth of today” he was eulogising were those godawful baby boomers.

Investing in your own home allows you to live in your home. That’s not affected by its market value.

The number of people failing to grasp this fairly simple point seems to be a big one. On the other hand, if you retire and your crappy old three-bedroom house is worth a million bucks because foreign investors have inflated a huge property bubble in Auckland, the ability to sell it and retire to some place where houses cost a third of that would be pretty attractive. And the prospect of the government acting to burst that bubble before your retirement might look correspondingly unattractive come election time.

Anyway, call me a capitalist if you like. I can’t deny it. All I can do is honestly declare that it was never my intention to become one – having always been one of those weirdos who thinks money is merely the means to an end…

Comment by Dennis Frank — July 28, 2016 @ 8:25 pm

Remember Dennis, you didn’t build that, it was just dumb luck and good fortune.

Re #83. True, Tom. Although I did serve my time as a wage-slave like most people.

Capitalism is a culture that combines building stuff with playing the market game. The productive economy has now been largely displaced by the global casino. The proles go to Sky City to play on magic money machines programmed to turn them into losers most of the time. Ants milk aphids, and corporations suck the money out of small businesses in the same methodical way. And left/right voters keep on mandating this process.

Humans on their robotic march into the future: left/right, left/right…

@Kumarahow many property rentiers are the same people who gambled on the 1980s sharemarket bubble

the ’87 sharemarket crash was nearly 30 years ago (side note: fuck, I am getting old). If you were then 40 and plowed your savings into Equity Corp or Brierly Investments you’re now 70 and, presumably, looking to exit a lot of your property portfolio and take the cash.

You’re right that a lot of people got burned and vowed to never invest in the share market again. But they would have been investing in property through the ’90’s and 00’s so I’m not convinced they’re the ones to blame for the current problems in the Auckland housing market.

Phil: “You’re right that a lot of people got burned and vowed to never invest in the share market again. But they would have been investing in property through the ’90’s and 00’s so I’m not convinced they’re the ones to blame for the current problems in the Auckland housing market.”

Other cities overseas have housing affordability issues as much as we do – mountains or water in the way, desirability to live, and booming economic sectors like tech, among others. But NZ seems largely unique in having a powerful speculator class (and the policies that lean in their favour) that thinks relaxing height limits will crash their investments, or cause the Mongrel Mob or Hells Angels to move in next door. Or both.